You always hate to let facts get in the way of a good argument, but when renting farmland, hard numbers help take the emotion out of the equation for tenants and landlords. So, Randy Luze, chairman of Peoples Company, a farm real estate and farm management company, Cedar Falls, IA, created a spreadsheet that literally puts all the rental options on the table.
“As an agent of the landowner, it's our responsibility to make sure they can take advantage of what the rent market offers. Our focus isn't to be in the cash-rent auction business to milk every dollar out of the farm operator that we can,” Luze says. “Most landowners and farm operators have long-term relationships but are apprehensive with the uncertainty regarding yields, prices and the rising cost of crop inputs. They just want to be treated fairly.
“The spreadsheet shows various rent options and their relative return to both landowners and tenants. As you work across the options, left to right, the relative risk and reward to the landlord increases with each option,” Luze says. “A 50-50 crop share, which isn't used much anymore, and retained ownership or custom farming create the two outside borders, and all the other rental options fall in between.”
The sample spreadsheet represents costs and returns for a 160-acre corn and soybean farm in Benton County, IA, with 78 acres planted to each crop. Selling price targets are $4.75 and $11 for corn and soybean yields of 190 bu. and 58 bu., respectively.
Luze's program includes farm data and crop history, projected crop production, crop budget, projected return on farm assets to the landowner under each management system and projected gross returns to the operator under each management system. Each party can see the other's bottom line.
“We see it as a discussion tool to bring landowners and farm operators together to look at the various risks and rewards that each type of lease provides, and help them select the best option for their needs,” Luze says.
“The farm lease needs to be equitable to both parties, and reward the level of production and price risk assumed by each. Then it needs to identify each party's risk tolerance and choose the type of lease that best matches the individual needs of each party,” he says. “It's also important that production risk is managed with crop insurance and the price risk managed with a written marketing plan.
“WE ALSO LIKE to discuss multi-year flexible rent arrangements to allow advance time to manage forward contracting of grain and securing crop inputs,” Luze says.
Rent expectations don't necessarily reflect the market. “I think that recently rents haven't kept up with the commodity price increases we've seen,” Luze says. “But, I'm also not sure that those expectations have lowered any with the decline we've seen in prices the last month.
“The spreadsheet defines the market that exists today,” Luze says. “And, if one guy squawks, it gives the other person the opportunity to show his side of the lease as well.”
Luze's spreadsheet includes flex lease options patterned after University of Illinois recommendations at www.farmdoc.uiuc.edu.
There's a fair amount of concern in the ag community about how a grower's local FSA office will view a flex lease. “I just don't see what the big concern is about giving up some of the government payment to the landlord,” Luze says. “A lot of our farmers are bumping up against the payment limitation anyway. If a flex lease works best for both parties, I wouldn't be too concerned about giving up $10 of government payments to the landowner.”
Luze developed the spreadsheet for his landowner clients, but it is available to outside landowners or producers for a fee. “This spreadsheet takes rents to the individual farm level and bases them on the quality of the land and its production history,” Luze says. “There's no reason it won't work for any farm.”